STARBUCKS INTERNATIONAL ENTRY STRATEGY

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(2) c . Starbucks International has gone beyond the normal philosophy of Starbucks, to create a rebirth of their product line in foreign countries. Typically in the Unites States, Starbucks owns its entire line of coffee-bar stores outright with no franchise investments or partnerships. However, their international operations are quite the opposite. Starbucks International has adopted a strategy of partnerships to create its line of international coffee-bar stores. These joint ventures create an increased ease of entry into the foreign market.. Starbucks International choose to be involved with partnerships for the benefits these relationships offered over their typical wholly owned subsidiary philosophy. However, choosing the right partner, poses a potential problem for the company. Although Starbucks uses multiple lines of distribution to saturate to US coffee market, its international operations consist only of coffee-bar restaurants. Therefore, they only have one channel of distribution internationally. Through this, Starbucks had to choose a partner that would facilitate their creation and expansion of coffee bars in the international arena, specifically Asia and Japan their primary target. Starbucks developed a series of criteria to which they evaluated different potential partnerships in Japan and other foreign countries. First, they sought to implement the idea of ͞partnership first, county second,͟ as a means of developing partnerships that focuses on the companies goals, and not the countries goals. Second Starbucks noted six additional criteria they used to narrow and conclude their partnership search. (1) They looked for companies with similar ideas about values and corporate life. (2) They wanted companies that had experience in the multi-restaurant business. (3) Potential partners had to have enough financial resources to help saturate a given market so as to counter the possibility of imitations. (4) Starbucks sought partners that had the ability and experience to locate prime real estate for coffee-bar locations with a (5) knowledge of the retail market. Finally, (6) Starbucks looked for partners who had the manpower available to make a full commitment to the project. It was this selection criterion which aided Starbucks in implementing the benefits of partnerships to their international operation expansion.. When looking at Starbucks international entry strategy, three main potential benefits arise from the development of the partnership. These benefits had and have the potential to be varying in their degree of usefulness dependent upon the entry strategy Starbucks chooses, in this case Joint Venture (partnership). The three main potential benefits of a joint venture entry strategy are: protection of the sustainable competitive advantage, reduction in the financial risk incurred by the firm (Starbucks), and the benefit of knowing how well the US product will do in the foreign market through local adaptation. We will examine each of these more fully from the viewpoint of Starbucks entering into the Japanese foreign market..

(3) In a company where coffee is a way of life, Starbucks had to fully deploy the creativity of its originator to develop a sustainable competitive advantage and be a focused differentiator. It could be said, that the quality of the coffee Starbucks serves is a competitive advantage, however, even though the coffee process is valuable to the company, it is not unique. It fact, they have developed their process from other peoples ideas, not their own invention. Actually, it is their people who are their competitive advantage. After all, working at a place you could be called a baristas, you know people are the business. The found of Starbucks agrees with this stating ͚͟Our only sustainable advantage is the quality of our work force͛͟. However, a joint venture offers the lowest possible protection of the sustainable competitive advantage (SCA). Therefore, Starbucks will have to implement strict guidelines to be able to keep their SCA alive and well in the Japanese market. Starbucks partnership with Sazaby, Inc., an upscale retail and restaurant operating company, they did just that, protected their SCA with a company that shares the same type of SCA while being a focused differentiator.. Still, a joint venture relation ship does offer a moderate reduction in the financial risk Starbucks must incur. When Starbucks developed it 50/50 partnership with Japanese based Sazaby, Inc., they cut their financial risk in half. However, the financial risk for the entire partnership is inflated due the a higher priced product, compared with other coffee͛s available in the market, and because of the possible risk factors associated with local adaptation of their product.. Finally, it is that local adaptation which serves as the greatest benefit of the partnership. Local adaptation looks at how well a US product will sell in the foreign market. A partnership allows for the collaboration between foreign and US partners to develop a product that will functionally be similar to the original US product yet also appeals to the consumers of the foreign market. Starbucks coffee bar design seems to have been a good match for the Japanese market. The coffee culture in Japan is that of a kissaten, coffeehouses with a formal sit down atmosphere. However, the largest and most well known coffee in the Japanese market place is the Doutor Coffee Company, the ͞McDonald͛s of coffee houses͟ in Japan. These coffeehouses are quite the opposite of the traditional kissaten. At Doutor, seating is scarce, but standing bar room is ample. Starbucks, through their normal structure, struck a common ground. With a more casual atmosphere, Starbucks offer patrons ample seating areas and dine in or carry out services. However, there was originally some worry about the profitability and future growth of the Italian-style coffees in Japan. Japanese had never been exposed to this type of coffee before, so the taste of espresso drinks was as foreign to them as the name Starbucks. However, Starbucks͛ managers were confident that Japan was ready to indulge in the fine taste of Italian espresso. All in all, the partnership between Sazaby and Starbucks provided a moderately high benefit for local adaptation.. Starbucks plan of a partnership is the best choice for an entry strategy into the international market. Their increased insight into the market, and the other benefits provided by this relationship, will propel Starbucks International espressoly in the future..

(4) Bibliography:. c Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. The following six guiding principles will help us measure the appropriateness of our decisions. Provide a great work environment and treat each other with respect and dignity. Embrace diversity as an essential component in the way we do business. Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee. Develop enthusiastically satisfied customers all of the time. Contribute positively to our communities and our environment. Recognize that profitability is essential to our future success.. III. Company͛s goals and objectives. Starbucks had some very good and professional goals for their company in the future. Not all goals were about dominating the market, but some were to earn the respect of customers and stockholders. Shultz wanted the company to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility. He spoke of having a keystone value in the effort ͞to build a company with soul͟. That keystone value was that the company would never stop pursuing the perfect cup of coffee. Shultz wanted Starbucks to be known as the best place to buy specialty coffee that did not add any artificial flavoring polluting their product. Along with earning the respect of customers, Shultz also wanted to keep the respect and treat his employees with care. He wanted to offer Health benefits and stock options to all employees who worked 20 or more hours per week. Starbucks wanted to become a national company with values and guiding principles that employees could be proud of.. Earning the respect of customers and employees were not the only goals of Starbucks, but like any other company, growth was also on the mind. One of the first goals and dreams of Shultz was to setup Espresso bars in all the stores like he had experienced in Italy. He felt that the friendly and pleasurable environment would help the company grow and make customers feel that coming to a Starbucks was a good time. Shultz also had a plan to open 125 new stores outside the Pacific Northwest and outside the.

(5) United States in the next five years. He wanted to open 15 stores the first year and five more each additional year. To keep the quality of coffee that Starbucks sold, Shultz felt that the store should only be company-owned and not franchised out.. -Strengths and weakness, opportunities and threats. Starbucks, like many other companies had some strengths and weaknesses. One of the best strengths that a company can have is a CEO who is not afraid to take a chance and try knew things. Before Shultz came over to Starbucks the company did not have any plans of major growth or product expansion. Companies should always have knowledge of what they are selling and that is what Starbucks did. They knew everything that there was to know about coffee and if they didn͛t they would find out. Starbucks always prepared all of their managers and employees by sending them to training seminars and classes to learn how to roast the perfect bean, brew the perfect cup and how to serve each customer correctly. Starbucks believed in quality of its products and the character and location of its stores.. Companies all have strengths, but they also have weaknesses to. Weaknesses were very easy to see when the company was first put together. Baldwin and Bowker were very narrow-minded and had no desire to expand the company very far. The two were also afraid to try knew things such as starting an Espresso bar and a sit in area where people can sit around, talk and make new friends. Though after Shultz took over the company, it seemed as though the weaknesses started to dissolve and the opportunities began to grow. Shultz took advantage of the opportunity to expand the company into new areas and markets. Entering new markets brought forward the idea of creating new product lines. They started by selling bakery goods at the espresso bars and along with selling their beans, they began to sell their Starbucks Barista home espresso machine. Opening the Espresso bar also enabled them to sell the CD͛s that the company played while customers sat and drank. Partnering with Dreyer͛s and Pepsi enabled Starbucks to put their name on ice cream products and the cold beverage market by creating Frappuccino. This all enables the company to earn an additional profit.. Expanding too fast is one of the most important threats that Starbucks may encounter. Opening all these new stores at such a drastic rate can cause the company to endure major debt. Debt can cause a series of chain reactions leading to lower wages, cutting benefits, closing stores and laying off workers. These are not major threats now, but at an uncontrollable rate, this is one of the main threats that can really affect the future of Starbucks Coffee..

(6) Comparing Starbucks financial ratios to that of the Industry can give us a general perspective of Starbucks financial strength. This could also give some indication of stock price performance. Most of Starbucks ratios are in line with the industry average, but there are a few that could explain the poor stock performance recently experienced. Starbucks price to earnings ratio is well above the industry average, but this could be due to its relative high growth it has experienced. Return on equity is well below the average for the industry, and this could be an area of concern. This suggests that the investment made by shareholders in the firm has not produced a decent return when compared to the industry average. Starbucks gross margin is also below the average for the industry, suggesting that it is not able to cover its operating expenses as well as other firms in the industry.. The face of the coffee industry has changed dramatically this decade. The number of coffee shops in operations has more than quadrupled since 1991. As of 1997 eight thousand specialty coffee outlets were in operation in the United States. Starbucks good fortune in this industry motivated many aspiring rivals in this industry to pursue a plan of expansion. Analysts of this of the coffee specialty arena believe there is room for two or three major competitors. As of 1997 Starbucks closest competitor, Second Cup which is based mainly in Canada was less than a third of its size. As of August of 1999 Starbucks had opened 2,152 stores in the United States. Starbucks also opened 252 stores internationally. Most of Starbucks international stores were located along the Pacific Rim and the United Kingdom. During the fiscal year of 2000 Starbucks plans to open 600 new stores, 450 in the United States, the rest abroad.. Starbucks may eventually encounter formidable competition. Before 1997 no adversary of Starbucks had as many as 250 stores. In contrast Starbucks had opened over 1500. However according to the Starbucks case analysis there were at least twenty different local and regional chains that wanted to become serious rivals of Starbucks. Such prospects included New World Coffee, Coffee People, Coffee Station, Java Centrale, and Caribou Coffee. Many observers expected these chains to merge to better validate themselves as an alternative to Starbucks. New World in particular is making a concerted effort to compete with Starbucks. In August of 1998 New World purchased Manhattan Bagel Inc. Currently New World not only sells coffee but also is the second largest Bagel retailer in the United States. Also New World Coffee purchased Chesapeake Bagel Bakery. New World's identity is a franchise that sells specialty coffee and bagels. At the end of 1998 New World had franchised, licensed, or owned 335 stores in 18 states, Washington, DC and internationally. New World is growing very rapidly. On Aug 12, 1999 New World reported a %668 increase in second quarter earnings.. There are three basic strategies Starbucks could implement to improve there position as the leader in specialty coffee sales. The first is a pricing and/or promotion campaign. For years, Starbucks has relied on word of mouth to build their customer base. But with such an aggressive expansion track, Starbucks could benefit from some instant exposure to introduce themselves to those in new areas that have not heard of Starbucks. While this is a viable alternative, it is not the one of choice. Starbucks has a history.

(7) of creating a clientele rather than advertising for one. Temporary pricing promotions seem to contradict the lifestyle choice of Starbucks customers. Starbucks coffee is a quality product offered at a higher price for customers who appreciate it and can afford it.. Another direction the company could go would be to cut expansion and decrease the channels of distribution of their products. Starbucks has expanded at a torrid pace of more than a store a day in 19xx. Each new store costs the company $315,000 to build. Starbucks is moving fast into many different areas of distribution as well. Their coffee is now being sold in grocery stores and even on the Web. Starbucks runs the risk of over exposing itself to the public, and with so many different channels of distribution, may even curtail customer traffic in their own stores. However, long term debt for the company has been more than held in check. Starbucks owes less than #### in long term debt and of the 1500 new stores opened in 1997, only two have since been closed down. And in 1997 new stores generated an average of $700,000 in sales compared with new stores in 1992 at $427,000. Starbucks should cut back on some of the products they offer, especially on their Web site. The only tie-in these products have with Starbucks is their high price. Starbucks has taken some criticism for over-saturating the market with their coffee, but putting an end to expansion because a few numbers have slipped is not the answer.. Slowing expansion, rather than stopping it, seems to be a better strategy. Concentrating on existing stores to fend off possible competition from other firms is the best choice for the company. Starbucks must be sure that the current level of management is capable of being stretched even thinner before it should think about further expansion. For years Starbucks has stressed quality and has carefully trained its employees and managers in the art of brewing a better cup of coffee. In the past, techniques were studied and a great importance was given to understanding the process involved in giving the customer what he or she wants. New stores will have employees that may be rushed into service and the culture of Starbucks cannot be force-fed.. The competition with Starbucks for specialty coffee sales is increasing. Its nearest competitor has only a fourth of the stores Starbucks has, but the overall increase is significant. The number of coffee cafes in the United States has risen from 500 in 1992 to a predicted 10,000 by the end of this year.. Starbucks may have gotten off track a little bit with an overzealous lust for expanding too fast into every market. Easing off expansion while concentrating on their core competencies should ultimately enable Starbucks to reach its goals of serving quality coffee in over ten thousand stores worldwide..

(8) 1.) Howard Schultz is a CEO with a vision. He want's Starbucks to be the most recognized and respected brand of coffee in the world. He believes in creating a "Starbucks lifestyle" by selling various items over the Internet. He want's Starbucks stores all over the world, and continues expanding Starbucks internationally. Howard Schultz is fixed on creating an environment to completely satisfy customers, while maintaining a positive workplace for employees. He also pursues the profitability of Starbucks, to ensure future business success. As compared to Al Dunlop, Al also had a vision but it was more short term oriented. Al's vision was to rebuild Sunbeam and make it a profitable business, and maximize shareholder wealth.. 2.) The key elements of Starbucks strategy is to expand Starbucks globally, and to further develop its Internet business. The Strategy has changed over time as the business has grown exceptionally well in North America, and now they want to take that success over seas. At first the strategy was to create a pleasing atmosphere for customers as well as employees, and to build the Starbucks brand. The strategy has worked; proof to that would be the exceptional growth the company has experienced.. 3.) The management of Starbucks communicated the strategy and strategic changes to the members of the company by allowing them to feel as if they are an important part of the business. Employees receive extensive training, and are encouraged to help Starbucks become a better company. Management has created a workplace where the employee can speak his mind without the fear of any retribution. Employees can discuss issues with management vocally or through the use of comment cards. Management strives to instill a guideline of values and principals (developed by management and employees) on how to completely satisfy customers. They have done a good job as Starbucks continues to be a successful company maintaining customer satisfaction and providing a good working environment.. 4.) Starbucks has had great financial performance from 1992 to 1998. Revenues along with earnings have increased dramatically. The Strategy has worked well for Starbucks, they have had strong financial performance, and they still continue to grow.. 5.) Howard Schultz should continue to expand the Starbucks brand internationally, focusing on the Asia Pacific region. There he has the greatest potential in being successful. As far as expanding into Europe, he should take his time developing a solid plan before trying to compete with local coffee bars. Starbucks will probably receive the most resistance here. Schultz may have gone to far by trying to create a lifestyle easily purchased off the Internet, and should focus on selling coffee related products. Part of the drop in stock price in July was due to the Internet business as investors felt it would not be successful. Schultz should use the Starbucks brand to sell coffee, not home furnishings..

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